Chapter 7: Regulation of financial services

Question 1

Principal aims of regulation (4)

Answer 1

1. to correct market inefficiencies and promote efficient and orderly markets
2. to protect consumers of financial products
3. to maintain confidence in the financial system
4. to help reduce financial crime

Question 2

Outline the forms of Regulation (3)

Answer 2

1. prescriptive regimes - with detailed rules as to what may or may not be done
2. freedom with publicity - involves freedom of action but with rules on publicity so that third parties are fully informed about the providers of financial services
3. outcome-based regimes - which focuses on achieving suitable outcomes

Question 3

The four main types of regulatory regime (4)

Answer 3

1. unregulated markets - where no financial services specific regulations apply, market participants are instead subject to the normal laws of the land.
2. voluntary codes of conduct - drawn up by the financial services industry itself.
3. self-regulation - organised and operated by the participants in a particular market without government intervention.
4. statutory regulation - in which a government body sets out the rules and policies them.

Question 4

The costs of regulation: (2)

Answer 4

1. Direct costs - direct costs arise in administering the regulation
2. Indirect costs - indirect costs arise from changes in behaviour, both of consumers and regulated firms, to react to the regulations

Question 5

Statutory regulation advantages

Answer 5

This has the advantage that it should be less open to abuse than the alternatives and may command a higher degree of public confidence.

Question 6

Statutory regulation disadvantages: (2)

Answer 6

1. A disadvantage of statutory regulation is that outsiders may impose rules that are unnecessarily costly and may not achieve the desired aim.
2. It is claimed that attempts by government to improve market efficiency usually fail and that financial services regulation is an economic good that is best developed by the market.

Question 7

Advantages of self-regulation: (3)

Answer 7

1. The regulatory system is implemented by the people with the greatest knowledge of the market, who are therefore able to max the benefits and minimise the costs.
2. Self-regulation should be able to respond rapidly to changes in market needs.
3. It may be easier to persuade firms and individuals to co-operate with a self-regulatory organisation than with a government bureaucracy.

Question 8

Disadvantages of self-regulation: (3)

Answer 8

1. The closeness of the regulator to the industry it is regulating, which lead the regulator to side with the regulator.
2. Consumers may lack confidence in the regulator.
3. Self-regulatory organisations may inhibit new entrants to a market.